Microsoft Smart Not To Buy Yahoo...But Now's The Time To Do The Better Deal

Now that Yahoo’s stock has crashed through $16, clobbered shareholders are clinging to the thin hope that Microsoft’s Steve Ballmer will make another play for the company. This time around, moreover, they’d be thrilled with a bid of $20.

But Steve’s not going to buy Yahoo no matter how low the stock goes, Kara Swisher says. And he’s smart not to do so. Why? Because, as we said shortly after Steve made his original $31 offer, Microsoft buying Yahoo would be a disaster.

However!

Yahoo’s demolished stock does create a better opportunity to pursue a deal that does make sense: A spinout of Microsoft’s Internet unit into Yahoo.

Why would this be a smart deal? Well, first lets review why Microsoft buying Yahoo would be a disaster:

At least a year of deal purgatory (which has already set in. See Jerry’s notes to the troops pleading that they keep working, Yahoo and Microsoft resumes hitting the street, Yahoo’s distracted management team, Google’s lobbying engine, etc.)

Microsoft is already fighting too many wars. No company can do everything, and Microsoft is already competing with IBM, Oracle, and the emerging SaaS industry on one side, Apple, Sony, RIM, etc, on another, and Google, Time Warner, et al on a third.

At Microsoft, the Internet will always play second fiddle to the Windows and Office cash cows. At Google, every idea that will disrupt Microsoft is rushed into production. At Microsoft, every such idea will be buried in politics and bureaucracy. This will make it very hard for Microsoft to attract and retain the best talent and for the Internet company to succeed.

Microsoft and Yahoo still get to combine forces against Google: dominant in email, dominant in display, dominant in IM, dominant in third-party network advertising, dominant share of pageviews/users, an ad must-buy, etc.

The stand-alone company can build its own identity, culture, strategy

The stand-alone company can issue stock options, make acquisitions, and compete with Microsoft (which it will almost certainly have to do to succeed)

Microsoft can continue to focus on its core mission–software.

Microsoft’s shareholders will benefit from the New-Yahoo upside (and have a hedge against the core business)

The deal can be done immediately, with no year of deal purgatory (a big drawback of the Microsoft-Yahoo acquisition).

No tax hit for long-term Yahoo shareholders.

No dilution to Microsoft shareholders.

Yahoo can be fixed without being destroyed.

Easier for the stand-alone company to acquire the wreckage of AOL

So get cracking, Steve! At this point, you’d probably only have to dump $10-$15 billion or so of cash into the combined entity to get control. And Microsoft shareholders would benefit, too, as you’d get the Internet division’s losses off your books.